Whether the problem lies with iTunes 8, with the iPhone Software 2.1, or the App Store itself remains unclear, but users on Apple'sdiscussion boards have discovered several fixes for the problem. They include:

The most popular fix is to look through your collection of apps in iTunes 8 for generic black-and-white icons and delete them. (iTunes prompts to make sure you want to remove the app from your library, and then to see if you want to delete the actual files - click Move to Trash to do that.) Next, "repurchase" the apps from the App Store to download them again - Apple won't charge you. (You will see a dialog asking if you want to buy the app, but a subsequent one confirms that you can download for free.) After clearing and redownloading apps with generic icons, updating should work properly.